The Ricardo-Barro effect is based on the idea that ________ when the government has a budget deficit.

Question

Quizplus · Accepted Answer

The Ricardo-Barro effect suggests that when the government runs a budget deficit, individuals expect that higher taxes will be required in the future to pay off the deficit. This expectation leads them to increase their private saving in the present to prepare for future tax payments. As a result, private saving increases in response to government deficits, which offsets the increase in government borrowing and results in no net change in interest rates.

The Ricardo-Barro Effect Is Based on the Idea That ________